Monday, October 26, 2020

In Bitcoin We Trust?

ASK THE CFP® PRACTITIONER


 

 

“There are three eras of currency: Commodity based, politically based, and now, math based.”

~ Chris Dixon, Co-founder of Hunch and

SiteAdvisor, now owned by EBay and McAfee

Question: Could you explain Bitcoin and crypto-currency?

Answer: Unless you’ve been working in Santa’s workshop at the North Pole preparing for his Christmas Eve ride, you’ve probably heard of Bitcoin. Bitcoin is a digital currency that’s on fire; some experts even say it’s a bubble waiting to pop. Everyone is talking about Bitcoin, but what is it? I’ll do my best to share what I’ve studied and absorbed on this disruptive crypto-currency.

 

 

First, here are a few quotes on Bitcoin illustrating the diverse opinions on this topic. Bill Gates said, “Bitcoin is a technological tour de force,” while Warren Buffet tells us to “Stay away from it. It’s a mirage, basically.” Finally, Rick Falkvinge, founder of the Swedish Pirate Party said, “Bitcoin will do to banks what email did to the postal industry.”

Bitcoin is one of many digital currencies based on a network of public ledgers called blockchain. Blockchain is an elegant and complex technology that keeps track of things that we’ll look at in more detail another day. As it pertains to cryptocurrency, blockchain is a recordkeeping system for digital wallets. Blockchain technology applications reach far beyond Bitcoin and include cloud storage, healthcare, digital security and even voting systems.

Bitcoin isn’t a real currency or a commodity, but it can serve as a medium of exchange and a store of value just like regular money. It’s also had a role in illegal activity such as drug deals, money laundering, and other crimes, just like “regular” currency. Bitcoin is also an option for those who may be uncomfortable with government and central banks. While techno-wizards love Bitcoin, economists in general aren’t big fans yet because the logistics of real-world application remain relatively unknown.

Currency has evolved from cash, checks, and credit and debit cards. Apple Pay is an example of digital currency backed by the dollar. Processing transactions with cash, debit and credit cards and digital currency can be expensive and slow. It’s believed that crypto-currency is an improvement and will increase efficiency for global electronic payment processing.

Bitcoin is distinctive because there’s a limited supply, which will never exceed 21 million units. This is in contrast to the U.S. dollar, which as a fiat currency has an unlimited supply and is backed by our Central Banking System, also known as “The Fed.” Bitcoin’s price is determined by supply and demand. The frenzy is real and this cryptocurrency continues to impress and confuse.

The volatility and relative illiquidity of Bitcoin makes it a challenge to use the currency for things like buying groceries or paying bills. Unlike the U.S. dollar or the euro, Bitcoin is not backed by a central bank. Like our currency though, Bitcoin is only valuable because people believe it’s valuable. Fed Chair-Nominee Jerome Powell testified that the central bank was watching Bitcoin and other crypto-currencies, but “they are just not big enough to matter.”

Still, just because it’s a bubble doesn’t mean that it can’t go a lot higher, or lower.

Value is generally determined by future earnings potential which are adjusted for risk, otherwise known as fundamental analysis. The other way to determine value is to know what someone else is willing to pay for something like a work of art or other collectable.

Right now, Bitcoin is a crypto-currency trading like the dotcom stocks of the 1990s.

The unconfirmed creator of Bitcoin is Satoshi Nakamoto. Some suggest that the names of these four companies may be the basis for the anonymous founder’s name: SAmsung, TOSHIba, NAKAmichi and MOTOrola. Satoshi only communicated via email and other computer forums avoiding telephone or in-person conversations, further fueling the speculation. Ironically, Bitcoin’s fractional denominations are called Satoshi, which equals one hundred millionth of a full Bitcoin.

Will Bitcoin replace legal tender? That remains to be seen. Long-term trends in the financial technology space are expected to be disruptive and powerful. E-commerce growth will likely benefit as more internetenabled smartphones are put into use globally, especially in regions that don’t have modern payment infrastructures but are heavily populated.

According to PayPal’s third-quarter 2017 results, thirty-five percent of total payment volume originated from mobile phones, an increase of 54% year-over-year, with most of that being overseas. Peter Thiel of PayPal said, “I do think encrypted money has the potential to do something like change the world.”

Crypto-currency demand will likely increase as global electronic payment processing becomes a more efficient way to transfer wealth. Blockchain technology (the ledger) is advancing rapidly with its influence reaching far beyond the financial services sector.

Bitcoin is the first realm to utilize this elegant technology, but it won’t be the last.

Cryptocurrency, Bitcoin and blockchain technology are innovative and could transform society. Stay focused and invest accordingly.

There is no assurance that any of the trends mentioned will continue in the future. Past performance is not indicative of future results. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. The opinions expressed are those of the writer, but not necessarily those of Raymond James and Associates, and subject to change at any time. Bitcoin issuers are not registered with the SEC, and the Bitcoin marketplace is currently unregulated. Bitcoin and other cryptocurrencies are a very speculative investment and involves a high degree of risk. Investors must have the financial ability, sophistication/ experience and willingness to bear the risks of an investment, and a potential loss of their investment. Securities that have been classified as Bitcoin-related cannot be purchased or deposited in Raymond James client accounts.

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER ™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.”

This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc., Member New York Stock Exchange/SIPC, 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached by phone at 239-389-1041, or by email: darcie.guerin@raymondjames.com. Website: www.raymondjames.com/Darcie.

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